Are your IT Infrastructure Contracts Safe?

Added to existing cost pressures, FS institutions are coping with severe macro-economic headwinds such as high inflation, soaring interest rates and volatile currencies. Multiyear IT contracts are generating price shocks at renewal as a consequence of inflation-related increases. This is resulting in significant rise in IT spend for enterprises coupled with already squeezed technology budgets. Some IT service providers on the other hand have been facing the heat due to high inflation and increased cost of living that is eating away their margins and piling up their losses.

Amidst all this, a unique situation has built up that is posing high risk for few FS firms. Data Centre managed service contracts are under pressure as some service providers look to restructure their loss-making deals mid-term. We are witnessing FS firms in the UK being notified by their incumbent IT service providers, their intent to exit current Data Centre & infrastructure managed service contracts resulting in potential risk of service disruption for the FS firms.

Our hypothesis

We have identified three challenges which are acting together to weaken the business case for Data Centre Managed Services deal for providers:

1. Macroeconomic volatility: The current uncertainty in macroeconomic environment, rising inflation, increasing salaries, soaring rents and utility prices are contributing to high expenses in maintaining large data centre facilities.

2. Unsustainable pricing commitment: A few service providers have overcommitted on benefits from transformation and labour arbitrage to win deals by showcasing a highly optimistic business case to the client which becomes unsustainable in long term.

3. Regulatory pressures: FS firms face stringent regulatory requirements that adds to the pressure on the service providers worsening the existing situation. For instance, FS firms face challenges meeting and reporting national requirements on sustainability by reducing carbon emissions from their Data Centres.

The above challenges are adding pressure on the supply side, that in turn are imposing the following risks on FS firms:

• Financial risk: Risk of additional cost of migration and management of Data Centre in case enterprises exit the current deal.
• Operational risk: Temporary service disruption in operational flow due to migration / transition.
• Business risk: Disruption in Data Centre operations may further lead to potential risk of interruption / delay in online services to enterprises’ end customers.
• Regulatory risk: Risk of service disruption may put the FS firm on high radar among the regulators such as FCA and PRA in case of material outsourcing arrangements.

Solution options

As FS firms manage their risk, they need to decide on the direction of travel by choosing from a handful of options. Key options are:

1. Continue with existing contract: Review the plan proposed by the existing service provider to migrate to alternate Data Centre and align on expectations, risks, technical constraints, resource commitment and impact on quality of services while migrating. Choosing this option would mean going with double migration, one to a new facility as part of existing contract and the other when the deal expires. It has high financial, operational, and business risk.

2. Migrate to an alternate host before the exit deadline: This option would mean identifying and selecting an alternate service provider and transferring the services currently in scope of the incumbent to the new service provider hosted DC. This option assumes aggressive timelines for sourcing and transition and requires high resource availability and significant planning.

3. Stand up a new bank infrastructure in parallel and migrate the customer data eventually: This option suggests setting up a parallel banking infrastructure through new digital technologies and eventually migrating the customer data from existing DC to here. This option requires owning and running duplicate infrastructure and applications for a longer period until it is thoroughly tested and validated before migrating. However this option minimises service disruption and throws an opportunity to adopt new digital technologies and move away legacy infrastructure in the long run.

4. Extend the current contract as-is until transformation is complete: This option assumes paying higher fees to incumbent service provider to keep the DC running whilst they invest in transformation initiatives. This will be like postponing the inevitable.

Conclusion

As a next step, the FS firms will need to evaluate the above options through considerations such as commercial viability, timelines, resource requirements, alignment with long term vision of the FS firm, and risk of service disruption. Any preferred option will need to be backed by a resource heavy, vetted business case.

Deloitte is a strategic partner to several FS firms and helps enterprises identify the right option, develop a compelling business case to support decision making, and implement the best-fit solution to minimise risk and maximise value for its partners.